Tag Archives: greater fool theory

So, The greater fool theory

The world depends on fools.

Your friend gets punched in a club while drunk-touching girls. He is a fool. Others laugh.
Dude at Geylang thinks he owns the road. He is a fool. He gets rammed by a greater fool. And again, others laugh.
You sell your Dragonball card to your buddy back in primary school for 5 bucks. He (me) is a fool. You laugh your way to the bank.

We all derive some form of incentive from fools.

So, the greater fool theory, as described by good ol’ Investopedia:

When acting in accordance with the greater fool theory, an investor buys questionable securities without any regard to their quality, but with the hope of quickly selling them off to another investor (the greater fool), who might also be hoping to flip them quickly. Unfortunately, speculative bubbles always burst eventually, leading to a rapid depreciation in share price due to the selloff.

This is the reason why Japanese men hang themselves or jump from Mount Fuji.

Lesson 1 – Do not be a fool or you just might end up rotting somewhere in a forest.

So, how does the share price of a company rise other than being affected by the collective dumbness (supply and demand, sentiments) of all the other speculators?

There several  theories that try to explain why prices move the way they do. But just like every other theory that is based off the nature of human beings, none of them hold true unless there are a bunch of fixed assumptions. Even at IPO stage, prices can shoot sky high or sink to the depths of hell because valuations are also subjective.

There are, however, certain fundamentals that value investors like to look at, which will affect market sentiments and eventually share price – things like profits, future growth potential, cash flow, debt and a bunch formulas like EPS or P/E Ratio. Basically indicators of an already-good-but-could-be-way-way-way-way-better company because, like it or not, a a sweet juicy orange will always cost more if it becomes a bigger sweet  juicy orange. The whole point is to buy a piece of that orange and wait for it to grow bigger so that the other fools will start to take more notice of it.

Perhaps this is the reason why the markets are becoming more and more volatile.

Anyway, I will look more in depth into things and post them as I learn.

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